The Trade-Inflation Nexus: The Role of Production Networks

Thuy Hang Duong and Weifeng Larry Liu

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: From the 1990s until COVID-19, the world experienced a sustained period of low and stable inflation, alongside a marked increase in trade integration among countries. This paper examines the impacts of international trade on inflation through production networks. We first construct a theoretical model of an open economy to illustrate how input-output networks propagate the price impacts of trade shocks. Using Australia as a case study, we find that the network impacts of trade shocks on inflation are as significant as their direct impacts, and primarily propagate upstream, based on data of 47 manufacturing industries from 2000 to 2023. Australia’s low inflation before COVID benefited from increasing exposure to China’s low-cost exports, while inflation surged during COVID due to global supply chain disruptions, among other factors. This paper underscores the importance of economic globalization for inflation through production networks, and offers several implications for monetary and trade policies.

Keywords: inflation; international trade; production networks; propagation of shocks (search for similar items in EconPapers)
JEL-codes: C67 D57 E31 F13 F41 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2025-04
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2025-23

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